Tags: ecb | fed | forcing | currency | war

WSJ: How ECB Is Forcing Fed's Hand in Undeclared Currency War

WSJ: How ECB Is Forcing Fed's Hand in Undeclared Currency War
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By    |   Wednesday, 31 July 2019 08:26 AM

Federal Reserve policy makers reportedly are essentially being forced to cut interest rates because of the European Central Bank’s much-lower policy rate.

If losing demand to Europe weakens U.S. growth and threatens to push inflation too low, U.S. rates also must also drop, The Wall Street Journal explained.

“The ECB’s policy rate, at minus 0.4%, is already nearly 3 percentage points below the Fed’s. And last week ECB President Mario Draghi strongly hinted it will soon go further into negative territory. Fed officials have concluded they cannot permit U.S. rates to deviate too far from their foreign counterparts’. So even though the U.S. economy is in much better shape than Europe’s, the ECB is helping to force the Fed’s hand,” the Journal reported.

The U.S. central bank now is factoring not just foreign economic developments but also foreign interest rates into where U.S. rates ought to be.

“U.S. rates can diverge to some extent from global rates but there’s a limit to how far that process can go, because of integrated capital markets,” Fed Vice Chairman Richard Clarida said recently on Fox Business Network.

“If one central bank raises rates and another doesn’t, capital pours into the first country, pushing its currency up and putting downward pressure on inflation, exports and economic growth. In the other country, the opposite occurs. These dynamics are why other countries often follow the Fed. This year, though, the Fed is a follower, not just a leader,” WSJ.com explained.

To be sure, the widely expected quarter-percentage-point lowering of borrowing costs, however, is unlikely to assuage President Donald Trump’s increasingly strident demands for the central bank to ease monetary policy, Reuters said.

On Tuesday, Trump again called for a large interest rate cut. The Republican president has blamed the Fed under Chairman Jerome Powell for undercutting his administration’s efforts to boost economic growth.

Fed officials hope a modest rate cut will lower the odds of a recession by helping to boost tame inflation at home and offset risks from slowing growth abroad and rising tensions with trading partners like China.

The central bank is expected to leave the door open to further rate cuts should those risks fail to dissipate.

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If losing demand to Europe weakens U.S. growth and threatens to push inflation too low, U.S. rates must also drop
ecb, fed, forcing, currency, war
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2019-26-31
Wednesday, 31 July 2019 08:26 AM
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